Governance Through Liability

Question 1

Compare with Piercing veil

Answer 1

Basis for imposing liability on corporate management is that their actions constitute a legal wrong which grants corporate stakeholders a remedy;

Whereas in piercing the corporate veil, basis is that mgmt. conduct involved misuse of corporate form

Question 2

Types of management self-dealing

Answer 2

1) Shirking: underinvest in managerial competence and care
2) Excessive risk aversion in investment decisions
3) Looting: varieties of fraud as well as breaches of the strict equitable rules - e.g. expropriation of corp asset
4) Control transactions: where an insurgent seeks to wrest the levers of corporate power from incumbent management

Question 3

Mechanisms for solving self-dealing issues

Answer 3

1) Product market competition
2) Labor market competition
3) Stock market
4) Market for corp control: M&A and takeovers
+ liability mechanism

Question 4

What can directors be sued for?

Answer 4

Breach of

1) Duty of care
2) Duty of loyalty, either by CI or taking business opportunity
4) Oppression

Question 5

How can directors be sued?

Answer 5

Derivative action

Question 6

Court’s role in overseeing board’s decisions?

Answer 6

Balance between:

1) Directors may become very risk averse if they feel they will be second-guessed for sour business decisions in hindsight
2) SH want incentives for board and management to put corp’s interest first